TaxTMI Updates e-Newsletter
Apr 07,2012

Penalty under section 271(1)(c) - Bonafide legal claim based on legal opinion - Mere wrong legal claim not amounting to furnishing inaccurate particulars - Explanation 1 to section 271(1)(c) - burden shifts but penalty only when explanation absent, false or unsubstantiated - Acceptable/reasonable explanation test for levy of penalty

Penalty under section 271(1)(c) - Bonafide legal claim based on legal opinion - Mere wrong legal claim not amounting to furnishing inaccurate particulars - Explanation 1 to section 271(1)(c) - burden shifts but penalty only when explanation absent, false or unsubstantiated - Acceptable/reasonable explanation test for levy of penalty - Whether deletion of penalty levied under section 271(1)(c) was justified - HELD THAT: - The Tribunal accepted the CIT(A)'s finding that the assessee had made the claim for exemption after obtaining legal opinion and that the bona fides of that advice were not impugned. Relying on the settled principle that a mere legal claim, even if ultimately unsustainable, does not by itself constitute furnishing of inaccurate particulars, the Tribunal held that the correctness of the exemption under section 54G is not the determinative factor for imposing penalty. The Tribunal explained that Explanation 1 to section 271(1)(c) only shifts the onus to the assessee and permits imposition of penalty when (a) there is no explanation, (b) the explanation is found to be false, or (c) the assessee fails to substantiate that the explanation was bona fide and that all material facts were disclosed. Applying this test, the Tribunal found the assessee's explanation to be reasonable and acceptable on the facts - particularly because the claim was disallowed on a technical construction of 'urban area' and the assessee had taken legal advice - and that the revenue had not shown that the explanation was false or unsubstantiated. The Tribunal also noted the reiterated authorities that an explanation must be acceptable to the fact-finding body and that not every incorrect or unrealistic explanation suffices; but on the present facts the requisite bona fides and reasonableness were established, justifying quashing of the penalty. [Paras 5, 6, 8, 9, 10]

The order deleting the penalty was upheld and the appeal dismissed.

Final Conclusion: The Tribunal affirmed the CIT(A)'s quashing of penalty under section 271(1)(c) for AY 2006-07, holding that the assessee's bona fide legal claim based on legal advice and a reasonable explanation dispelled the presumption necessary for levy of penalty.

Disallowance under section 40(a)(ia) - fees for professional services - tax deduction at source - reimbursement versus deductible expenditure - computation of income under the head "Profits and gains of business or profession" - remand for fresh verification and adjudication de novo

Disallowance under section 40(a)(ia) - fees for professional services - reimbursement versus deductible expenditure - tax deduction at source - remand for fresh verification and adjudication de novo - Whether the disallowance of Rs 28,05,085 under section 40(a)(ia) in respect of payments to outside lawyers is sustainable or requires fresh adjudication. - HELD THAT: - The Tribunal held that section 40(a)(ia) operates only to deny deduction of amounts that have been claimed as business or professional expenditure under sections 30 to 38; reimbursements that are profit-neutral and not claimed as deductions cannot be disallowed under section 40(a)(ia). The factual question whether the amounts paid to outside lawyers were merely reimbursed by clients (and separately itemised in bills) or formed part of composite bills and thus were claimed as deductible expenditure is determinative. The manner in which TDS was effected by the clients does not conclusively determine whether the assessee treated the payouts as reimbursements; that is a question of fact to be ascertained from the bills and account entries. In the absence of a categorical finding that the payments were claimed as deductions, the legal basis for the disallowance under section 40(a)(ia) is deficient. The Tribunal therefore directed remand to the Assessing Officer for de novo adjudication, with an opportunity of hearing and a speaking order, to verify whether the payments were routed as reimbursements or claimed as expenditure and then proceed in accordance with law. [Paras 7, 8, 9]

Matter remitted to the Assessing Officer for de novo adjudication and verification of whether the payments to outside lawyers were reimbursements or deductible expenses, with a direction to pass a speaking order after giving the assessee a fair hearing.

Final Conclusion: The appeal is allowed for statistical purposes by remitting the issue of disallowance under section 40(a)(ia) (AY 2006-07) to the Assessing Officer for fresh verification and adjudication in accordance with law.

Reopening of assessment under Section 147 and notice under Section 148 - reopening beyond four years - proviso to Section 147 requiring failure to disclose fully and truly all material facts - change of opinion not a ground for reassessment - finality of assessment and disclosure of material facts - availability of efficacious alternative remedy and scope of Article 226 jurisdiction

Reopening of assessment under Section 147 and notice under Section 148 - change of opinion not a ground for reassessment - finality of assessment and disclosure of material facts - Whether the notices under Section 148 for AYs 1995-96 and 1996-97 are liable to be quashed at the threshold on the petitioner's contention that reassessment is based on change of opinion and that there was full disclosure in original returns. - HELD THAT: - The High Court declined to quash the impugned Section 148 notices at the threshold. The court observed that the assessing authority recorded reasons to believe that income chargeable to tax had escaped assessment and that the statutory time limits for issuance of notices were satisfied. It reiterated the settled principle that reassessment cannot be sustained if founded only on a mere change of opinion, but held that the present proceedings could not be terminated by writ on the material placed before the Court. Where an efficacious alternative statutory remedy exists, the court will ordinarily refrain from exercising extraordinary writ jurisdiction in assessment matters. The petitioner was directed to raise objections before the assessing officer and to produce records to substantiate its accounting method and disclosures; the assessing officer would consider those objections and pass reasoned orders. The court thus refused to accept the petitioner's submission for quashing at this stage and left the merits to be examined by the tax authority. [Paras 19, 24, 25, 26]

Impugned notices under Section 148 are not quashed at this stage; petitioner must raise objections before the assessing officer and the notices stand.

Availability of efficacious alternative remedy and scope of Article 226 jurisdiction - reopening beyond four years - proviso to Section 147 requiring failure to disclose fully and truly all material facts - Whether the High Court should entertain writ petitions challenging the reopening notices instead of permitting the assessing officer to consider objections and record reasons. - HELD THAT: - The court affirmed the principle that when an adequate statutory remedy exists, writ jurisdiction under Article 226 should not normally be invoked to short-circuit assessment proceedings. It noted that the assessing officer had recorded reasons for reopening and that the petitioner had not sought those reasons before the authority. Consequently, the Court directed the petitioner to file objections within a limited period and directed the assessing officer to consider and decide them on merits by a reasoned order within a fixed timeframe. This leaves open the challenge to any final order by the appellate remedies provided in the statute. [Paras 25, 26]

Writ petitions dismissed; petitioner permitted to file objections and assessing officer directed to decide them on merits within prescribed periods.

Final Conclusion: Writ petitions dismissed. The petitioner is directed to file objections to the Section 148 notices within four weeks; the assessing officer shall consider those objections and pass a reasoned order on merits and in accordance with law within eight weeks thereafter; the question of validity of reassessment remains open for decision by the tax authority and appellate fora.

Section 35AB - Section 37 - transfer of know-how - lump sum consideration - meaning of "paid" in Section 43(2) - one-sixth deduction - remand for fresh consideration

Section 37 - transfer of know-how - Deductibility under Section 37 of payment under the agreement dated 24 May 1993 (preliminary survey/payment of US$2,00,000) as not being for transfer of know-how falling under Section 35AB. - HELD THAT: - The agreement of 24 May 1993 was for a preliminary survey and feasibility study and did not provide for transfer of technical know-how; if the collaboration did not materialise there would be no transfer. Both the CIT(A) and the Tribunal found as a question of fact and contract interpretation that the payment was not for transfer of know-how and therefore Section 35AB did not apply. In that factual and legal view the amount paid in respect of the preliminary survey was allowable under Section 37. The Tribunal's confirmation of the CIT(A)'s finding is sustainable on the record and does not warrant interference. [Paras 10]

Payment under the 24 May 1993 agreement is not for transfer of know-how and is allowable under Section 37; Section 35AB is not attracted.

Section 35AB - lump sum consideration - meaning of "paid" in Section 43(2) - one-sixth deduction - Applicability of Section 35AB to the agreement dated 1 October 1993 and entitlement to deduction of one-sixth of the lump sum in the relevant previous year. - HELD THAT: - The agreement dated 1 October 1993 involved transfer of technical know-how and fixed total consideration payable by instalments. The Tribunal and CIT(A) held that the fixed aggregate amount constituted a lump sum consideration within the meaning of Section 35AB despite deferred payments. Applying the definition of "paid" in Section 43(2) (relating to mercantile accounting and incurrence of liability), the assessee had incurred liability for the entire amount in the relevant previous year and was therefore entitled to claim one-sixth of the lump sum in that year with the balance in equal instalments over the next five years. This conclusion follows the reasoning in the court's precedents relating to accrual/incurrence and is sustained on the facts and law. [Paras 11]

The agreement of 1 October 1993 falls within Section 35AB; one-sixth of the lump sum is deductible in the previous year as the assessee incurred liability for the entire amount.

Remand for fresh consideration - Addition on valuation restored to Tribunal for fresh decision. - HELD THAT: - Following the Court's earlier decision referenced by the parties, the question concerning the addition on valuation (Question (H) in the substantial questions) is required to be restored to the Tribunal for fresh adjudication. The parties agreed that this ground must be remitted for reconsideration in accordance with that precedent. [Paras 13]

Question (H) restored to the Tribunal for fresh decision.

Remand for fresh consideration - Deduction of lease rent and depreciation for computing deduction under Section 80HHC restored to Assessing Officer for fresh decision. - HELD THAT: - By consent of the parties the question whether lease rent and depreciation on leased assets may be deducted while computing taxable profit for the purpose of Section 80HHC (Question (I)) was directed to be sent back to the file of the Assessing Officer for fresh consideration and decision. [Paras 14]

Question (I) restored to the Assessing Officer for fresh decision.

Final Conclusion: Appeal disposed: Questions (A), (B), (F) and (G) are not substantial in view of earlier decisions; Question (C) answered in favour of the assessee - payment under the 24 May 1993 agreement allowable under Section 37 and the 1 October 1993 agreement held to attract Section 35AB with one sixth deductible in the relevant year; Question (H) is restored to the Tribunal and Question (I) is remitted to the Assessing Officer for fresh decision; no order as to costs.

Disallowance of foreign expenses incurred on the relatives of directors - premium paid on redemption of debentures characterised as revenue expenditure - analogy between issue discount and redemption premium for classification as business expenditure - remand for fresh consideration due to lack of independent application of mind by the Tribunal

Disallowance of foreign expenses incurred on the relatives of directors - Deletion by the ITAT of the Assessing Officer's disallowance of foreign expenses incurred on relatives of directors was not sustained. - HELD THAT: - The parties agreed that this question must be answered against the assessee in view of the Court's contemporaneous decision in the companion appeal. On that basis the Court answered the framed question in the negative and in favour of the Revenue. The Court therefore held that the Tribunal's deletion of the disallowance could not be sustained. [Paras 3]

Answered in favour of the Revenue; the ITAT's deletion of the disallowance is not upheld.

Premium paid on redemption of debentures characterised as revenue expenditure - analogy between issue discount and redemption premium for classification as business expenditure - Actual premium paid on redemption of non convertible debentures is to be treated as revenue expenditure and allowable as a deduction. - HELD THAT: - The Court considered the facts that the assessee issued non convertible debentures repayable with a premium and paid the premium in the relevant previous year. Applying the principle in Madras Industrial Investment Corporation Ltd. - that an additional future liability arising from issue of debentures at a discount represents a liability incurred for the purpose of business and is revenue in nature - the Court held by analogy that a premium paid on redemption is the converse of issuance at a discount and similarly represents a business liability for the use of funds. On that reasoning the actual premium paid on redemption is allowable as revenue expenditure, provided it has not already been allowed pro rata in earlier years as observed by the lower authorities. [Paras 6, 7, 8, 9]

Allowed in favour of the assessee; the premium on redemption is revenue expenditure deductible in the relevant year.

Deletion of additions in value of inventory and goods in process - remand for fresh consideration due to lack of independent application of mind by the Tribunal - The deletions made by the Tribunal in respect of additions to inventory and goods in process are set aside for fresh adjudication. - HELD THAT: - The Court observed that the Tribunal had not furnished an independent application of mind and had merely adverted to the findings of the CIT(A). For that reason, and as explained in the companion appeal, the grounds relating to valuation additions in inventory and goods in process are restored for fresh decision by the Tribunal so that the issues may be independently evaluated and determined. [Paras 10]

Grounds restored and remanded to the Tribunal for fresh consideration and decision.

Final Conclusion: The appeal is disposed as follows: the deletion of disallowance relating to foreign expenses on relatives of directors is answered in favour of the Revenue; the actual premium paid on redemption of debentures is held to be revenue expenditure deductible in the relevant year; and the issues concerning additions to inventory and goods in process are remanded to the Tribunal for fresh decision. There shall be no order as to costs.

Debenture Redemption Reserve - Reserve versus provision for a known liability - Book profit under Section 115JA - Pre-operative expenses treated as revenue expenditure

Debenture Redemption Reserve - Reserve versus provision for a known liability - Book profit under Section 115JA - The Debenture Redemption Reserve set aside by the assessee is not a 'reserve' for the purposes of the Explanation to Section 115JA and hence cannot be excluded from book profit. - HELD THAT: - The court applied the principle that amounts retained to meet a known liability cannot be treated as 'reserves' for the purposes of preparation of accounts under Schedule VI to the Companies Act and accordingly for computing 'book profit' under Section 115JA. It followed the reasoning in National Rayon Corporation Ltd. which held that monies set apart to redeem debentures are amounts to meet a known liability and therefore are not reserves within the meaning of Schedule VI; secured loans (including debentures) must appear as liabilities and any provision to meet them is not a reserve. The court observed that labelling an amount as a 'reserve' does not alter its substantive character where the amount is retained to meet a present/known obligation. Applying that principle to the facts, the amount designated as Debenture Redemption Reserve was held to be monies set apart for a known debenture liability and thus excluded from the concept of 'reserve' in Explanation (b) to Section 115JA. [Paras 2, 3, 4]

Tribunal was correct in deleting the adjustment; no substantial question of law arises in respect of the Debenture Redemption Reserve.

Pre-operative expenses treated as revenue expenditure - The expenditure incurred in respect of the Steel Division at Nashik (pre-operative expenses) is of a revenue nature and the Tribunal correctly deleted the disallowance. - HELD THAT: - The Tribunal's conclusion was founded on its earlier orders in the assessee's preceding assessment years, which treated analogous pre-operative expenses as revenue expenditure. The assessing officer himself recorded that the items in question-salaries and wages, staff welfare, power, travelling, legal and professional fees and miscellaneous expenses-were revenue in nature. In view of the character of the expenses and the consistent precedent in the assessee's earlier assessments, the Tribunal's deletion of the disallowance was held to raise no substantial question of law. [Paras 5]

Deletion of the disallowance in respect of the pre-operative expenses sustained; no substantial question of law arises.

Final Conclusion: Revenue's appeal is dismissed; there shall be no order as to costs.

Transfer by relinquishment under section 2(47) - right to convert advances into shares as a capital asset under section 2(14) - characterisation of compensation as capital receipt versus income from other sources - computation of capital gain (short-term/long-term) on pro rata basis - recomputation of eligible profits for deduction under section 80IC vis-a -vis proviso to section 80IA(8) - powers of assessing officer to adopt a reasonable basis where market value computation presents exceptional difficulties - deletion of addition of interest receivable for lack of basis and in view of earlier Tribunal finding

Transfer by relinquishment under section 2(47) - right to convert advances into shares as a capital asset under section 2(14) - characterisation of compensation as capital receipt versus income from other sources - computation of capital gain (short-term/long-term) on pro rata basis - Whether the Rs.10 crores received for waiver of the right to convert advances into equity shares of KPCL is taxable as capital gain or as income from other sources - HELD THAT: - The Tribunal held that the assessee's right to convert advances into allotment of shares constituted property within the wide meaning of section 2(14) since it arose from agreements and was enforceable. The relinquishment of that right amounted to a transfer as envisaged by clause (ii) of section 2(47). The advances paid by the assessee were the consideration by which the right was acquired; hence the amount received on its relinquishment is liable to tax as capital gain. The Tribunal rejected the contention that no cost of acquisition existed, noting that the payments made to KPCL conferred the right. The capital gain is to be computed as long-term or short-term on a prorata basis depending upon the period of investments/advances. [Paras 8, 9, 11]

Rs.10 crores is taxable as capital gain (transfer by relinquishment); treated as capital receipt and to be computed short-term or long-term on pro rata basis

Recomputation of eligible profits for deduction under section 80IC vis-a -vis proviso to section 80IA(8) - powers of assessing officer to adopt a reasonable basis where market value computation presents exceptional difficulties - Whether the deduction under section 80IC claimed by the assessee should be restricted and, if so, on what basis the eligible profits are to be recomputed - HELD THAT: - The Tribunal observed that where goods or services are transferred from another business to the eligible business and market value computation presents exceptional difficulties, the proviso to section 80IA(8) permits the assessing officer to recompute eligible profits on a reasonable basis. The facts showed a disproportionate profit margin at the Dehradun unit compared with the Mekaguda unit, with material transfers of APIs and indicia of expenses being shifted to understate costs at Dehradun. Given these circumstances and the statutory power to adopt a reasonable basis, the Tribunal set aside the matter to the file of the assessing officer to bring comparable cases on record and to redo the computation, including consideration of cost records, reasonable profit percentage or market value where practicable. [Paras 13, 14, 17, 18]

Issue remitted to the assessing officer for fresh computation of eligible deduction under section 80IC on a reasonable basis in accordance with the proviso to section 80IA(8)

Deletion of addition of interest receivable for lack of basis and in view of earlier Tribunal finding - Whether addition of interest receivable of Rs.1,32,78,739/- on advances to a sister concern should be sustained - HELD THAT: - The Tribunal found that the Assessing Officer had no basis to hold that interest relating to the relevant year had been charged but not disclosed. The matter was covered in favour of the assessee by an earlier Tribunal decision for earlier assessment years, and the assessee admitted interest for the aggregate period in the subsequent assessment year after a Board resolution determining the chargeability. Absent any specific evidence that interest had been levied in the year under consideration and not disclosed, the first appellate authority rightly deleted the addition. [Paras 19, 21]

Addition of interest of Rs.1,32,78,739/- deleted; Revenue's ground dismissed

Final Conclusion: The appeals are partly allowed: the Rs.10 crores received on waiver of the right to convert advances into shares is held to be taxable as capital gain (to be computed short-term or long-term on a prorata basis); the claim for deduction under section 80IC is remitted to the assessing officer for recomputation on a reasonable basis under the proviso to section 80IA(8); and the addition of interest receivable is deleted and the Revenue's ground on that issue is dismissed.

Disallowance of expenditure "in relation to" exempt income under Section 14A - Assessing Officer's duty to verify the correctness of the assessee's claim and, if not satisfied, determine disallowance by a reasonable and acceptable method (Maxopp principle) - Burden on the assessee to identify/segregate funds used for investments to rebut applicability of Section 14A - Prospective operation of Rule 8D does not absolve the Assessing Officer's pre-Rule 8D obligation to examine and determine disallowance

Disallowance of expenditure "in relation to" exempt income under Section 14A - Burden on the assessee to identify/segregate funds used for investments to rebut applicability of Section 14A - Assessing Officer's duty to verify the correctness of the assessee's claim and, if not satisfied, determine disallowance by a reasonable and acceptable method (Maxopp principle) - Whether the deletion by the Tribunal of the disallowance made under Section 14A in assessment for AY 2001-02 was justified and what further course should be adopted. - HELD THAT: - The Court noted that the Tribunal recorded findings of fact that borrowed funds were not used for certain investments and that those factual findings were not to be revisited. However, the assessment order showed that the Assessing Officer made a disallowance under Section 14A after expressing dissatisfaction with the assessee's failure to segregate or identify funds used for investments yielding exempt dividend income. Applying the principle in Maxopp Investment Ltd. , the Court reiterated that even in the pre-Rule 8D period the Assessing Officer must first verify the correctness of the assessee's claim regarding expenditure relatable to exempt income; if not satisfied for cogent reasons, he may determine the amount of disallowance by a reasonable and acceptable method of apportionment. The Court observed that the Assessing Officer had expressed an intention to compute the disallowance but was handicapped by lack of details from the assessee. In these circumstances, deletion by the Tribunal without remitting the matter for requisite verification and computation was not appropriate. The Court clarified that its remit is not an expression that disallowance must be made, nor does it determine quantum; the Assessing Officer is to examine and, if necessary, compute disallowance keeping in view the Maxopp ratio. The Assessing Officer is, however, precluded by this order from reopening the question of disallowance of interest which has already been dealt with.

Tribunal's deletion of the Section 14A disallowance set aside and matter remitted to the Assessing Officer to examine and, if required, compute any disallowance under Section 14A in accordance with the principles in Maxopp; no reconsideration of the interest disallowance.

Final Conclusion: Question of law answered by remitting the matter to the Assessing Officer to examine and, if necessary, quantify any disallowance under Section 14A for AY 2001-02 in accordance with the Maxopp principle; the Assessing Officer shall not re-open the issue of interest disallowance.

Deduction of tax at source under Section 194-I - property owned by co-owners - definite and ascertainable share - assessment in individual hands vs assessment as an association of persons - CBDT clarification regarding application of the Rs.1,20,000 limit to co-owners

Deduction of tax at source under Section 194-I - definite and ascertainable share - CBDT clarification regarding application of the Rs.1,20,000 limit to co-owners - Whether the threshold of Rs.1,20,000 per annum under Section 194-I applies separately to each co-owner where the property is owned by several persons having definite and ascertainable shares and rent is paid to them separately. - HELD THAT: - The Court held that Section 194-I was enacted to widen the tax base but its proviso exempts payments where the aggregate payable to the payee in a year does not exceed Rs.1,20,000. Section 26 applies where buildings are owned by two or more persons and their respective shares are definite and ascertainable, directing assessment in the individual hands of such persons and not as an association of persons. Physical partition is not required; the test is whether shares are determined and ascertainable. Here each co-owner's share in the property was recorded and each received rent by separate cheque in amounts below Rs.1,20,000 per annum, and those receipts were assessed individually. The CBDT Circular (Q.21) confirms that where several payees have definite and ascertainable shares, the Rs.1,20,000 limit applies separately to each co-owner. Applying these principles, the obligation to deduct tax at source under Section 194-I did not arise for the payer in respect of payments to each co-owner whose individual receipts were below the threshold.

The threshold under Section 194-I applies separately to each co-owner with a definite and ascertainable share; no TDS obligation arose where individual co-owner receipts did not exceed Rs.1,20,000 per annum.

Property owned by co-owners - assessment in individual hands vs assessment as an association of persons - definite and ascertainable share - Whether the owners constituted an Association of Persons (AOP) for the purpose of Section 194-I merely because income from the property accrued jointly and the property was not physically divided. - HELD THAT: - The Court reiterated that where shares in the property are definite and ascertainable, Section 26 mandates assessment of income in the hands of the individual co-owners and precludes assessment as an AOP. The absence of physical division by metes and bounds does not prevent application of Section 26; what matters is that each co-owner's share is determined. On the facts, the co-owners' shares were recorded, rent was paid to each in accordance with those shares and assessed in their individual returns. Consequently, the characterization of the payees as an AOP was not appropriate and the payer's obligation to deduct tax from payments to an AOP did not arise.

The owners are not to be treated as an AOP for the purpose of Section 194-I where their respective shares in the property are definite and ascertainable, even without physical division.

Final Conclusion: Appeals dismissed. The Tribunal and Commissioner (Appeals) were correct in setting aside the Assessing Officer's demands under Sections 201(1) and 201(1A) because the rent paid to each co-owner with a definite and ascertainable share did not exceed the Rs.1,20,000 threshold and the payees could not be assessed as an AOP.

Definition of "income" under clause (ix) of sub section (24) of Section 2 - lottery involves an element of chance - ejusdem generis rule of statutory interpretation - non retrospective operation of statutory explanation

Definition of "income" under clause (ix) of sub section (24) of Section 2 - lottery involves an element of chance - Whether the value of the prize of 1 kg gold awarded under the State small savings incentive scheme was taxable as "winnings from lotteries" within the meaning of clause (ix) of sub section (24) of Section 2 for Assessment Year 1996 97. - HELD THAT: - The Court approved the Tribunal and CIT(A) findings that the statutory expression in clause (ix) must be applied strictly and that the term "lottery" imports an element of chance where a person who buys a ticket risks losing the amount paid. In the small savings incentive scheme the depositor makes an investment with a guaranteed return and faces no risk of loss of the principal or the return on maturity; the lucky coupon was incidental to an investment and not a purchase of a ticket exposing the subscriber to risk. The Court also observed that the categories listed in clause (ix) are ejusdem generis and that the facts of the present prize are not of the same genus as lotteries or races for the purpose of taxation under that entry. Reliance by the revenue on the Supreme Court decision in Commissioner of Income Tax v. G.R. Karthikeyan was distinguished on the basis that the prize there arose from an activity (All India Motor Rally) ejusdem generis with "races" and similar entries, which is not comparable to the present savings scheme. [Paras 11, 12, 13]

The prize of 1 kg gold awarded under the small savings incentive scheme did not amount to "winnings from lotteries" and therefore was not includible in "income" under clause (ix) for Assessment Year 1996 97.

Non retrospective operation of statutory explanation - Whether the Explanation to clause (ix) of sub section (24) (added w.e.f. 1.4.2002) applied to Assessment Year 1996 97. - HELD THAT: - The Court noted that the Explanation was inserted with effect from 1.4.2002 and there was no provision making it retrospective. Consequently the Explanation could not be invoked to tax receipts in Assessment Year 1996 97. The Court further observed that if prizes of the kind in question were already covered by the pre 2002 definition of "lottery" there would have been no need for the Explanation, reinforcing that the Explanation does not operate retrospectively to alter the tax position for the year in issue. [Paras 10, 13]

The Explanation added w.e.f. 1.4.2002 does not apply to Assessment Year 1996 97 and cannot be relied upon to tax the prize in question.

Final Conclusion: The appeal is dismissed; the Tribunal's decision upholding deletion of the addition is affirmed: the prize awarded under the State small savings incentive scheme for Assessment Year 1996 97 is not taxable as "winnings from lotteries" under clause (ix) of Section 2(24), and the Explanation inserted w.e.f. 1.4.2002 does not apply to that year.

Limitation and reasonable time for initiation of proceedings - no action against the payee as bar to passing order under section 201(1)/(1A) - duty to deduct tax at source - order under section 201(1) akin to assessment / reassessment

No action against the payee as bar to passing order under section 201(1)/(1A) - limitation and reasonable time for initiation of proceedings - order under section 201(1) akin to assessment / reassessment - Validity of orders passed under section 195 read with sections 201(1) and 201(1A) where no proceedings were initiated against the non-resident payees and the time for taking such action under section 147 had expired - HELD THAT: - The Tribunal applied the Special Bench decision in Mahindra & Mahindra Ltd., holding that an order under section 201(1) or (1A) cannot be passed where Revenue has not taken any action against the payee and the time for taking action under section 147 has expired. The Revenue was unable to show that any assessment or other proceedings were initiated against the non-resident payees within the period contemplated by that decision. The Tribunal further relied on supportive decisions of the Delhi High Court accepting that, in absence of a prescribed limitation, proceedings under section 201 must be initiated within a reasonable time (the Tribunal and some High Courts treating four years from the end of the relevant year as such a period). Conversely, contrary High Court decisions holding no period can be read into section 201 were distinguished and the Tribunal followed the view favourable to the assessee. Because no course remained to Revenue to assess the payee (the time for issuance of notice under section 148/section 147 having expired) the statutory basis for declaring the assessee in default under section 201(1)/(1A) was lacking. The Tribunal expressly declined to decide the substantive question whether the payments constituted fees for technical services or the applicability of DTAA, since the procedural/time-bar finding disposed of the matter. [Paras 11, 12, 13, 14]

Orders passed under section 195 read with sections 201(1) and 201(1A) are invalid and are set aside because no action was taken against the payees and the time for such action under section 147 has expired; appeals allowed.

Final Conclusion: The appeals are allowed: the orders under section 195 read with sections 201(1) and 201(1A) are held invalid and set aside on the ground that Revenue did not and could not take action against the non-resident payees within the permissible time; the Tribunal did not decide the substantive taxability of the payments or DTAA issues.

Application of seized assets under Section 132B(1)(i) - Retention of seized property pending penalty proceedings - Liability determined includes penalty levied

Application of seized assets under Section 132B(1)(i) - Retention of seized property pending penalty proceedings - Liability determined includes penalty levied - Whether respondents were legally entitled to refuse release of gold seized under section 132 until conclusion of penalty proceedings under section 271(1)(c), and whether Section 132B(1)(i) permits application of seized assets towards penalties not yet levied but to be determined in assessment. - HELD THAT: - The Court construed Section 132B(1)(i) as comprising two parts: (a) application of seized assets against any existing liability under specified tax laws; and (b) application against "liability determined" on completion of assessments (including liabilities determined under section 153A or Chapter XIV-B for the block period). The expression "liability determined" was held to encompass liabilities to be ascertained in post-seizure assessments and the phrase "penalty levied" in the provision must be read as penalty to be levied in proceedings (for example under section 271(1)(c)) connected with such assessments. Reading the provision otherwise - i.e., to permit retention only where a penalty has already been levied or an existing liability already crystallised - would render the latter part of clause (i) meaningless. Consequently, where assessments arising from a search have been completed and penalty proceedings have been initiated and remain pending, the statute entitles the revenue to retain seized assets and apply them towards liabilities so determined (including penalties), provided the person is in default or deemed to be in default. The Court rejected reliance on earlier decisions cited by the petitioner because those authorities concerned facts where appeals had been decided in favour of the assessee or the seizure was held illegal; those facts were distinguishable from the present case where assessments and initiation of penalty proceedings followed the seizure. [Paras 11, 12, 13, 14]

Respondents validly refused release of the seized gold pending penalty proceedings; Section 132B(1)(i) permits retention and application of seized assets towards liabilities determined (including penalties to be levied) where the assessee is in default.

Final Conclusion: Writ petition dismissed: the seized gold may lawfully be retained and applied by the respondents towards the liability determined (including penalty to be levied) under Section 132B(1)(i) while penalty proceedings under Section 271(1)(c) are pending, subject to the condition of default.

Arm's Length Price - Transfer Pricing Comparable Selection and FAR Analysis - Principles of Natural Justice in Transfer Pricing Proceedings - Reliability of Comparable Set and Exclusion of Aberrational Comparables - Mercantile System of Accounting and recognition of advance as income - Remand for verification of contradictory accounts and submissions

Arm's Length Price - Transfer Pricing Comparable Selection and FAR Analysis - Principles of Natural Justice in Transfer Pricing Proceedings - Reliability of Comparable Set and Exclusion of Aberrational Comparables - Legitimacy of upward transfer pricing adjustment of Rs.1,93,48,372/- made by TPO/AO in respect of international transactions. - HELD THAT: - The Tribunal upheld the Ld. CIT(A)'s conclusion that the TPO's exercise in selecting comparables and determining an ALP was flawed and haphazard. The CIT(A) found that the TPO used a broad and inappropriate sample of companies (including large software and high-margin enterprises) without proper FAR (functions, assets and risks) analysis, excluded loss-making comparables while retaining super profit making concerns, and applied inconsistent screening criteria (paras 12-12.6). The CIT(A) also found a failure of adequate notice and opportunity to the assessee in the transfer pricing proceedings, and noted factual features (captive low end back office nature of the tested division, cost plus 10% billing, and losses in the AE) that supported the assessee's contention of arms length pricing (paras 12.1-12.5, 12.9). The Tribunal, after reviewing the TPO's comparables (including evidence that the TPO's annexure was incomplete and that very large companies were included), agreed that the TPO's exclusion/inclusion choices and the overall comparable selection lacked a proper, consistent methodology and that there was no infirmity in the CIT(A)'s detailed reasoning; accordingly the upward adjustment was deleted (paras 9, 9.1). [Paras 9]

The addition of Rs.1,93,48,372/- on account of transfer pricing adjustment is deleted; the CIT(A)'s order upholding the assessee's position is affirmed.

Mercantile System of Accounting and recognition of advance as income - Remand for verification of contradictory accounts and submissions - Treatment of amount of Rs.1,13,84,034/- received from the holding company - whether it represented income of the year or an advance/liability. - HELD THAT: - The Tribunal observed a contradiction between the assessee's balance sheet (which described the sum as an advance against capital expenditure under sundry creditors) and the assessee's contemporaneous submissions to the assessing officer (which described the receipt as advance towards market research services). Neither the AO nor the CIT(A) examined this contradiction sufficiently. Given the factual uncertainty about the nature, purpose, utilisation and subsequent adjustment of the receipt, the Tribunal concluded that the matter required verification and directed restoration to the file of the AO for fresh enquiry. The AO was directed to give the assessee another opportunity to substantiate its claim with evidence and to decide the issue in accordance with law (para 16). [Paras 16]

Issue restored to the file of the AO for verification and fresh decision after affording the assessee an opportunity; ground allowed for statistical purpose.

Final Conclusion: The Revenue's appeal is partly allowed for statistical purposes: the transfer pricing adjustment of Rs.1,93,48,372/- is deleted and the CIT(A)'s order on that point is upheld; the question whether Rs.1,13,84,034/- is income or an advance is remanded to the AO for verification and fresh decision after giving the assessee an opportunity to substantiate its position.

Stay of recovery - consideration of stay petition - interim stay pending decision - direction to revenue to decide stay applications within a time-limit

Consideration of stay petition - direction to revenue to decide stay applications within a time-limit - The respondent shall consider and pass orders on the pending stay petitions filed against the assessment orders. - HELD THAT: - Having noted that appeals and stay petitions against the assessment orders for the assessment years 2009-10 and 2006-07 remain pending and the petitioner's request to defer recovery was earlier rejected, the High Court directed the first respondent to consider and decide the stay petitions (Exts.P3 and P7) within eight weeks. The order requires the revenue to take up and dispose of those stay applications within the specified time-frame. [Paras 3]

Respondent directed to consider and pass orders on Exts.P3 and P7 within eight weeks.

Stay of recovery - interim stay pending decision - Recovery pursuant to the impugned assessment orders is stayed until the respondent passes and communicates orders on the pending stay petitions. - HELD THAT: - In consequence of directing the respondent to decide the stay petitions within eight weeks, the Court ordered that until such orders are passed and communicated to the petitioner, any recovery action pursuant to the assessment orders (Exts.P1 and P5) shall remain stayed. This interim relief is coterminous with the decision period directed by the Court. [Paras 3]

Recovery under Exts.P1 and P5 stayed until the stay petitions are decided and communicated.

Final Conclusion: Writ petition disposed of by directing the revenue to decide the petitioner's stay applications within eight weeks; recovery under the assessment orders for AY 2009-10 and AY 2006-07 is stayed until such decision is passed and communicated.

Stay petition - abeyance of recovery proceedings - consideration of pending appeal by the assessing authority

Stay petition - abeyance of recovery proceedings - consideration of pending appeal by the assessing authority - Direction to the assessing authority to consider the pending stay petition and to keep recovery proceedings in abeyance pending such consideration. - HELD THAT: - The petitioner had filed appeals against the assessment and rectification orders and a stay petition seeking deferment of recovery. As the appeals and stay petition were pending before the second respondent, the High Court directed the second respondent to consider the stay petition within eight weeks from the date of the order. Pending such consideration, further proceedings for recovery of the amounts due under the assessment and rectification orders were ordered to be kept in abeyance. The court disposed of the writ petition by issuing this limited, time bound direction without adjudicating the merits of the underlying appeals or rectification.

Second respondent to consider the stay petition within eight weeks and, meanwhile, recovery proceedings under the impugned orders are to be kept in abeyance.

Final Conclusion: Writ petition disposed by directing the assessing authority to consider the pending stay petition within eight weeks and by restraining recovery proceedings pending such consideration.

Release of goods subject to conditions - payment of duty as per declared value - bank guarantee as provisional security for duty difference - personal bond for remaining duty difference - time-bound completion of adjudication after release - following earlier order/precedent

Release of goods subject to conditions - payment of duty as per declared value - bank guarantee as provisional security for duty difference - personal bond for remaining duty difference - time-bound completion of adjudication after release - Whether the seized goods should be released and on what conditions - HELD THAT: - The Court accepted the petitioner's submission that the matter is covered by the Court's earlier order and the respondents raised no objection to following that precedent. Accordingly the Court directed release of the goods subject to specified conditions: immediate payment of the entire duty as per the declared value; provision of a bank guarantee, acceptable to the respondent and drawn on a nationalised bank, covering 50% of the difference in duty to be maintained until adjudication; furnishing of a personal bond acceptable to the respondent for the remaining 50% of the difference in duty; and completion of the adjudication process by the respondents within four weeks of release, commencing by issuance of a show cause notice and affording the petitioner opportunity to file objections and cooperate through authorised representatives. These directions implement the earlier order and place both provisional financial security and an expedited adjudicatory timetable as prerequisites for release. [Paras 4]

Goods ordered to be released on payment of duty, provision of bank guarantee for 50% of duty difference and personal bond for remaining 50%, with adjudication to be completed within four weeks after release.

Final Conclusion: Writ petition disposed by following the Court's earlier order; goods to be released subject to payment of duty, specified bank guarantee and personal bond, and time-bound adjudication; connected misc. petition closed; no costs.

Admission of debt - Inability to pay debts - winding up petition - Sham or illusory defence - Leave to defend subject to furnishing security - Bank guarantee as security pending suit - Application of Mechalec principles in summary disposal and security for defence - No requirement of fresh prima facie case on default to furnish security

Admission of debt - Inability to pay debts - winding up petition - The company had unconditionally admitted liability and, having used the equipment, was unable to establish a defence to the petitioning creditor's claim. - HELD THAT: - The Court found that correspondence from the company (emails of 29th July, 2008 and 26th March, 2009) amounted to an unconditional admission of liability for the instalments due under the sale agreement and showed no dispute as to the debt. The company had full use of the plant and vehicles in Schedule II and paid only part of the consideration. The combined effect of the admissions was that, by the time for payment of the 13th instalment (15th March, 2009), the company had unconditionally acknowledged the amounts payable, and the later contention that absence of papers excused payment was raised only after demand, thereby lacking bona fides. [Paras 9, 10, 11]

The company's admissions establish liability; it has not shown a bona fide dispute that would preclude winding up proceedings on the ground of inability to pay.

Sham or illusory defence - Application of Mechalec principles in summary disposal and security for defence - The defence set up by the company was held to be illusory or not bona fide, but the Court exercised discretion to permit the defence subject to conditions. - HELD THAT: - Applying the principles in Mechalec Engineers & Mfrs., the Court examined whether the company disclosed facts sufficient to entitle it to defend. The material showed no real defence; the contention about non-provision of documents was raised late and was inconsistent with earlier admissions. Where a defence is sham or illusory, the Court may nevertheless allow it to proceed on condition that security is furnished to protect the petitioning creditor's claim. The Court regarded the company's stance as not disclosing a bona fide defence but chose to exercise judicial mercy by permitting a conditioned defence. [Paras 14, 15]

The defence is not bona fide; however, the Court allows the company to prosecute its defence only on furnishing adequate security.

Leave to defend subject to furnishing security - Bank guarantee as security pending suit - No requirement of fresh prima facie case on default to furnish security - The Court directed specific relief: the company must furnish a bank guarantee as security and the petitioning creditor must sue within a fixed time; failing security, the petition may be admitted without proof of a fresh prima facie case. - HELD THAT: - Exercising its discretion, the Court ordered the company to furnish within four weeks a bank guarantee from a nationalised bank in favour of the petitioning creditor for the claimed amount and to keep it renewed until further order. The petitioning creditor is relegated to a suit to recover the claimed sum and must file that suit within four weeks of the security being furnished. If the company defaults in furnishing security, the petitioning creditor may apply for admission of the winding up petition and, in that event, need only prove default without establishing a fresh prima facie case. Additional directions protect the company from encashment of the guarantee without leave of the Court, and the guarantee need not be renewed if the petitioner fails to file the suit within the stipulated time. [Paras 15, 16]

Company to furnish the specified bank guarantee within four weeks; petitioner to file suit within four weeks thereafter; failure to furnish security permits application for admission of winding up without requiring fresh prima facie proof; guarantee not to be encashed without court leave; if petitioner does not sue in time, renewal not required.

Final Conclusion: The winding up petition is disposed of by relegating the petitioning creditor to a suit for recovery; the company is permitted to defend only upon furnishing a bank guarantee as security within four weeks, the petitioner must sue within four weeks of such security, and failure by the company to furnish the security will entitle the petitioner to apply for admission of the winding up petition without establishing a fresh prima facie case; no order as to costs.

Service in relation to sale of space or time for advertisement - advertisement tax as exercise of sovereign municipal function - BOOT/finance-for-rights arrangement (construction financing in exchange for advertising rights) - pre-deposit requirement under Section 35F of the Central Excise Act as applied to service tax matters

Service in relation to sale of space or time for advertisement - BOOT/finance-for-rights arrangement (construction financing in exchange for advertising rights) - Appellant's activity is prima facie covered by the taxable service "service in relation to sale of space or time for advertisement" - HELD THAT: - The Tribunal considered whether permitting erection and fixation of unipoles, sky-signs, kiosks and similar advertising boards by the Municipal Corporation amounted prima facie to providing a taxable service under the defined entry. The Presidential Member analysed the scheme and concluded that the advertising space taxed under the entry is the space on billboards, public places, buildings, conveyances etc., which is created and exploited by the party erecting and operating the advertising boards. In the facts, SDPS financed construction and erected and owned the advertising boards and subsequently rented out advertising slots; the Corporation merely permitted use of its property and, despite receipts being shown as advance tax, that permissive role does not prima facie convert the Corporation into a provider of the taxable "sale of space or time for advertisement." Having considered the BOOT/finance-for-rights arrangement, the President found it more appropriate prima facie to treat SDPS as the party creating and selling advertising space. On this basis the activity of the Corporation is not prima facie covered by the taxable entry. [Paras 36]

No

Advertisement tax as exercise of sovereign municipal function - service in relation to sale of space or time for advertisement - Advertisement tax collected by the appellant can be prima facie called consideration for the alleged taxable service - HELD THAT: - The Tribunal examined whether amounts collected and accounted by the Corporation as (advance) advertisement tax under municipal powers could be treated prima facie as consideration for a taxable service. The President noted a conflict between the contractual clause disavowing levy of advertisement tax during the contract period and the Corporation's accounting of receipts as tax; however, on the material before the Bench there was no prima facie basis to treat the receipts as consideration for sale of advertising space by the Corporation. The Corporation's statutory power to tax and its exercise in issuing receipts under the municipal enactment supported the view that the sums were being treated as tax rather than consideration for a taxable service by the Corporation. [Paras 36]

No

Pre-deposit requirement under Section 35F of the Central Excise Act as applied to service tax matters - service in relation to sale of space or time for advertisement - Requirement of pre-deposit for admission of the appeal and stay on recovery during pendency - HELD THAT: - There was a divergence of prima facie views among the two Members as to the existence of a case against the Corporation. The Judicial Member directed a substantial pre-deposit, while the Technical Member found the department's case prima facie without merit and waived pre-deposit. The President, after reviewing the record and reasoning, held that the appeal should be admitted and heard without any pre-deposit and that recovery of the demand should be stayed during pendency of the appeal. The Tribunal noted that, pragmatically, any service tax paid by SDPS could be adjusted and that on the material before it the Corporation was not prima facie the provider of the taxable service; accordingly, pre-deposit was waived for admission and a stay granted. [Paras 35, 36]

The requirement of pre-deposit is waived and recovery is stayed during the pendency of the appeal.

Final Conclusion: The appeal was admitted for hearing without any pre-deposit and recovery of the impugned demand was stayed; on the material before the Tribunal, the Municipal Corporation was not prima facie liable as provider of the taxable service nor was the advertisement tax charged by it prima facie the consideration for such a service, and the matter is to be placed before a regular Division Bench for final orders.

Maintainability of appeal before Commissioner (Appeals) in absence of adjudication - requirement of issuance of show cause notice and adjudication as precondition for appellate jurisdiction - invalidity of decision lacking statutory adjudicatory foundation

Maintainability of appeal before Commissioner (Appeals) in absence of adjudication - requirement of issuance of show cause notice and adjudication as precondition for appellate jurisdiction - invalidity of decision lacking statutory adjudicatory foundation - Whether the impugned order passed by the Commissioner (Appeals) is maintainable and valid in law in the absence of any show cause notice or adjudication. - HELD THAT: - The Tribunal found that no show cause notice had been issued and there was no adjudication or adjudicatory order against the appellants; consequently the appellate forum (Commissioner (Appeals)) had no adjudicatory order before it and the appeal entertained by that forum was not maintainable. Because the department did not challenge the Commissioner (Appeals) order before the Tribunal, the impugned order was characterised as not being an order in law. On these grounds the Tribunal held that the impugned order could not stand and set it aside. [Paras 5]

Impugned order set aside as not an order in law; appeal allowed.

Final Conclusion: The Commissioner (Appeals) order was set aside because it was rendered in the absence of any show cause notice or prior adjudication and therefore was not an order in law; the appeal is allowed.

Remand for de novo adjudication - opportunity of being heard - payment of service tax under state challans transferred to Central Government account - non-consideration of payments due to non-appearance

Remand for de novo adjudication - opportunity of being heard - payment of service tax under state challans transferred to Central Government account - Whether the matter should be remanded to the original adjudicating authority for fresh adjudication after giving the appellant an opportunity of being heard - HELD THAT: - The Tribunal recorded that the appellant had been regularly paying service tax but did so using State Government challans, which were subsequently transferred to the Central Government account. The adjudicating authority had proceeded ex parte because the appellant did not respond to the show-cause notice or attend the hearing, and therefore these facts and submissions were not considered. In view of the undisputed fact of payment on the record and the failure of the original authority to consider those payments for want of the appellant's appearance, the Tribunal found it appropriate to remit the matter for fresh consideration. The remand is for de novo adjudication so that the original authority may examine the appellant's submissions regarding the mode of payment and decide the demand, interest and penalties after affording the appellant a hearing. The Tribunal also waived the requirement of pre-deposit of interest and penalties for the purpose of taking up the appeal and stay, since service tax had been paid by the appellant. [Paras 2, 5]

Matter remanded to the original adjudicating authority for de novo adjudication after giving the appellant an opportunity of being heard; appellant directed to appear before that authority to fix the date of hearing.

Final Conclusion: Appeal and stay application disposed of by remanding the case for fresh adjudication by the original authority with directions to afford the appellant a hearing and to consider the payments made under State challans which were transferred to the Central Government account.

Admissibility of Cenvat credit on debit notes as duty paying documents - Compliance with prescribed particulars of duty paying documents under Rule 4A of the Service Tax Rules, 1994 - Effect of title of document where required particulars and payment are proved - Permissible reliance on judicial view held in earlier Tribunal decision

Admissibility of Cenvat credit on debit notes as duty paying documents - Compliance with prescribed particulars of duty paying documents under Rule 4A of the Service Tax Rules, 1994 - Effect of title of document where required particulars and payment are proved - Whether Cenvat credit can be availed by the assessee on the basis of debit notes issued by service providers where the debit notes contain the prescribed particulars and payment of service tax is evidenced. - HELD THAT: - The impugned order records that the debit notes issued by the two service providers contained the essential particulars required by Rule 4A of the Service Tax Rules, 1994 - details of service tax payable, description of taxable service, assessable value, service tax registration number and name and address of the provider - and were serially numbered. The assessee produced challans evidencing remittance of service tax, ST3 returns acknowledged by the department and confirmations from the service providers that the documents titled 'debit notes' served as invoices/bills in respect of the service tax payments. The Tribunal and the Commissioner applied the principle that the mere title of the document does not defeat Cenvat credit where the document satisfies the statutory requisites and payment into the Government exchequer is proven; on that basis the Commissioner examined the materials and concluded correctly that credit could not be denied. [Paras 1, 3]

Cenvat credit allowed on the basis of the debit notes which satisfied the statutory requisites and where payment of service tax was proved.

Permissible reliance on judicial view held in earlier Tribunal decision - Whether the Commissioner erred in relying on the Tribunal's decision in Pharmalab Process Equipment (P.) Ltd., notwithstanding that that matter was remanded in the earlier case. - HELD THAT: - The appeal contended that reliance on the Pharmalab decision was improper because that matter had been remanded. The Court examined the ground and observed that the earlier Tribunal had articulated the legal view that credit cannot be denied merely because service tax was paid on the basis of debit notes rather than invoices. The Commissioner applied those observations to the factual materials before him, conducted the requisite scrutiny of particulars, challans and returns, and reached a reasoned conclusion. Reliance on the Tribunal's view as a legal proposition, coupled with independent examination of the evidence, was therefore permissible. [Paras 2, 3]

No error in reliance on the Tribunal's view; the Commissioner independently examined the materials and correctly applied the legal proposition.

Final Conclusion: Appeal dismissed; the Commissioner correctly allowed Cenvat credit on the debit notes after satisfying himself that the documents contained the statutory particulars and payment of service tax was established.